Johnson & Johnson v. Fortis Advisors LLC, C.A. No. 490, 2024 (Del. Jan. 12, 2026) (Legrow, J)

On January 12, 2026, the Delaware Supreme Court largely affirmed the Court of Chancery’s post-trial decision, which held that Johnson & Johnson (“J&J”) fraudulently induced Auris Health, Inc. (“Auris”) into entering a merger agreement and breached its contractual duties to employ commercially reasonable efforts to meet certain earnout milestones.  The case provides critical guidance for the interpretation of post-closing efforts clauses that oblige the buyer to take efforts to hit earnout milestones while simultaneously affording the buyer discretion in its approach.

Background

On April 1, 2019, J&J acquired Auris, a medical robotics startup, for $3.4 billion in cash up front and the opportunity to earn up to $2.35 billion in the form of earnouts tied to ten regulatory milestones related to Auris’s two primary products: iPlatform, a robotic surgical system, and Monarch, a robotic endoscopy system aimed at diagnosing and treating lung cancer.  The earnout milestones were structured around a “minimally viable product” strategy common in the medical device industry in which a basic version of the device is first submitted to the Food and Drug Administration (“FDA”) for approval through its 510(k) premarket notification pathway, which allows for swift approval of medical devices where a similar device had previously been approved.  After that initial approval, iPlatform and Monarch could serve as their own 510(k) precedents for subsequent approvals of novel applications.

After none of the earnout milestones were achieved, Auris’s stockholder representative (“Fortis”) sued, arguing that J&J improperly undermined and prevented the achievement of the earnout milestones.  Following a ten-day trial, the Court of Chancery found J&J liable for beach of the implied covenant of good faith and fair dealing, breach of contract, and fraudulent inducement.  The Court of Chancery awarded Fortis over $1 billon based on the expected value of the earnout milestones at the time of contracting.

Legal Analysis

On appeal, J&J challenged each of the Court of Chancery’s liability findings, arguing that the lower court (i) erred in implying an obligation to pursue approval under a different clearance process due to an intervening regulatory change, (ii) misinterpreted the merger agreement’s efforts clause, and (iii) made unsupported fraud findings.

Implied Covenant.  Prior to closing, Auris obtained assurance from the FDA that iPlatform would qualify for the 510(k) pathway, notwithstanding a recent announcement that the FDA was in the process of “moderniz[ing]” its regulatory pathways.  Consequently, the earnout milestones were expressly tied to obtaining a series of regulatory clearances through the 510(k) pathway.  After the transaction closed, the FDA reversed course and informed J&J that iPlatform would need to be approved through the FDA’s more thorough De Novo clearance process used for medical devices without precedents.  J&J was initially non-plussed by this pivot; iPlatform was still on track to hit the earnout milestones if initially submitted for approval through the De Novo pathway.  Nonetheless, J&J treated the regulatory change as terminating its obligation to pursue the earnout milestones, wrote the contingent earnout liability off its books, revised employee incentives away from hitting the earnout milestones, and later halted development of iPlatform altogether.

The Court of Chancery ruled that J&J’s failure to pursue De Novo clearance for iPlatform constituted a breach of the implied covenant of good faith and fair dealing because the pivot to the De Novo clearance in light of the unforeseen regulatory change was necessary to preserve the parties’ bargain and the added costs and delay were immaterial.  The Supreme Court disagreed, noting that the earnout milestones were expressly tied to 510(k) approval and that the FDA’s change of heart was not unforeseeable.  Indeed, other contractual provisions, including those in the earnout provision, expressly contemplated regulatory change and made it clear that Auris bore the risk that the milestones would not be met due to factors outside of J&J’s control.  Thus, the Supreme Court concluded that there was no contractual gap to fill and reversed the Court of Chancery’s implied covenant liability finding.

However, the Supreme Court rejected J&J’s argument that the FDA’s change had a “domino effect,” rendering all of the earnout milestones impossible.  While the first iPlatform milestone could not be achieved because initial clearance would need to come through the De Novo pathway, iPlatform could serve as its own 510(k) precedent for the clearances required in connection with subsequent milestones.  Thus, the FDA’s decision did not absolve J&J from its contractual obligations to pursue regulatory approval of iPlatform.  And, in light of the Court of Chancery’s finding that pivoting to De Novo clearance would be immaterially burdensome for J&J, the Supreme Court concluded that the Court of Chancery’s damages analysis for subsequent iPlatform milestones was unaffected by its reversal of the Court of Chancery’s implied covenant finding.

Breach of Contract. The merger agreement contained a bespoke “commercially reasonable efforts” clause, which committed J&J to pursue the regulatory milestones with efforts consistent with its usual practice for “priority medical device products.”  J&J was also prohibited from acting with the intention of avoiding any earnout payment or from factoring the cost of an earnout into post-closing business decisions.  Still, the agreement preserved J&J’s discretion to adjust its efforts to achieve the milestones based on ten contractually identified factors, including efficacy, safety, developmental, and commercialization risks; challenges with regulatory approval; and product competitiveness and profitability.

The Court of Chancery ruled that J&J breached its efforts obligations by (i) putting iPlatform in a winner-take-all competition with J&J’s competing surgical robotics system, Verb, which diverted significant resources from the Auris team’s efforts to meet the first milestone; (ii) sidelining Auris leadership and combining the iPlatform and Verb teams, prompting significant attrition of Auris personnel and delays; (iii) abandoning the minimally viable product regulatory approval strategy that the milestones were tailored to, and (iv) changing employee incentives away from the earnout milestones.  This reasoning was buttressed by a comparison between J&J’s treatment of iPlatform to Velys, a comparable priority medical device.

J&J did not challenge the Court of Chancery’s factual findings but justified its actions under the ten discretionary factors.  In J&J’s view, the ten factors qualified its efforts commitment such that J&J retained prerogative to temper any efforts to meet the milestones based on its own business judgment.  The Supreme Court rejected this argument and affirmed the Court of Chancery, holding that “the ten factors permitted J&J to choose among reasonable paths toward achieving the milestones, but they did not authorize J&J to take actions that predictably undermined the achievement of the iPlatform regulatory milestones in favor of other business objectives.”

Fraudulent Inducement.  During pre-closing negotiations over the earnout milestones, J&J’s CEO assured Auris that one Monarch milestone was “highly certain” to be met because Monarch could be submitted as a subsequent application for a J&J catheter that was then under FDA review.  This was false.  As the J&J deal team learned just ten days prior, the FDA had opened a for‑cause investigation into a patient death in J&J’s clinical study for the catheter that occurred the previous month.  While J&J did not learn the outcome of the investigation until after the deal closed, it was clear to J&J that it risked substantially delaying approval of the catheter (and therefore the Monarch application) when J&J’s CEO made the representation, and J&J did not disclose these facts or uncertainty to Auris.

The Supreme Court affirmed the Court of Chancery, finding that J&J’s fraudulent inducement was well supported by the record and that J&J acted with at least reckless indifference to the truth.  The Supreme Court also reaffirmed Delaware’s longstanding doctrine that an express reliance disclaimer is required to bar a fraud claim premised on an extra-contractual statement, rejecting J&J’s argument that the merger agreement’s exclusive remedy provision was sufficient.

Index Terms:  earnout; efforts clause; commercially reasonable efforts; implied covenant; fraud; fraudulent inducement; reliance disclaimer

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